Shared responsibility: Attracting private investment is central to development plans

Two years into the Master Plan for the Acceleration and Expansion of Indonesian Economic Development (MP3EI), progress has been spearheaded by government-led projects. Despite incentives and institutions established to attract private investment to public-private partnerships (PPPs), projects have been hindered by challenges in land acquisition and inefficient coordination between different tiers of government.

While MP3EI’s future remains uncertain following the 2014 presidential elections, the outgoing administration is pursuing efforts to streamline key projects and expedite progress in developing much-needed infrastructure and accelerating Indonesia’s growth.

Track Record

Infrastructure remains a key constraint on Indonesia’s growth. Total government spending on easing these bottlenecks has been a mere 2% of GDP in the past decade, less than half of Thailand’s 3.6% and Malaysia’s 5.4% in 2012. Ranked 53rd of 160 in the World Bank’s 2014 Logistics Performance Index, lower than the Philippines and Vietnam, albeit an improvement on the 75th place achieved in 2010, Indonesia’s substandard infrastructure adds considerable costs to investment. Its logistics costs still account for 24% of GDP, compared to Vietnam’s 25%, Thailand’s 17%, Malaysia’s 13% and Singapore’s 8%. While the government has devoted a growing share of resources towards infrastructure development, rising from 8.2% of government capital expenditure in 2006 to 11.7% in the 2013 budget, a key plank of the MP3EI is private investment, meant to account for 51% of the Rp4482trn ($448bn) in spending to 2025. This includes 24.1% of purely private investment (Rp455.5trn, $45.6bn), 20.7% in PPPs (Rp390.9trn, $39.1bn) and 7.7% in hybrid projects involving public, private and state-owned enterprise investment (Rp144.9trn, $14.5bn).

Priorities

MP3EI provides a roadmap for transforming Indonesia into one the world’s 10-largest economies within 14 years. Premised on real annual GDP growth in the 7-9% range, the plan consists of six corridors of economic growth leveraging natural resources and existing industries on five islands. Roughly 41% of total MP3EI spending, or Rp1888trn ($189bn), is earmarked for infrastructure development to support intra- and inter-regional connectivity, including in toll roads and roads (23%), rail (13%), ports (8%), airports (2%), water utilities (2%), ICT (10%), and power and energy (24%). The IMF has published even more ambitious estimates for Indonesia’s infrastructure requirements in the shorter 2012-17 period: assuming infrastructure spending of 5% of GDP, requirements would be nearly twice as high at $363bn. Java, which accounted for 57.5% of GDP in 2012, is set to receive 48.8% of MP3EI spending on infrastructure, while Sumatra, with 23.6% of GDP, will receive 22.4% of funds. Commodity-dependent regional economies like Sumatra, Kalimantan and PapuaMaluku, which account for 4.8%, 9.5% and 2.2% of GDP, respectively, are to channel 9.9%, 8.8% and 6.4% of forecast infrastructure spending. The Bali-Nusa Tenggara corridor, which contributes 2.4% of GDP, will receive 3.7%.

The plan is to establish clusters in eight industries and 22 economic sectors, each specialising in a specific segment. The northern Java coastline will focus on petrochemicals and ship-building, while inland areas will be dedicated to lighter industries like food and beverages. South Sumatra and Riau will focus on palm oil, and Papua will expand exploration and production in hard commodities like gas, gold and copper, alongside agricultural plantations. Bali and Lombok will develop their tourism and food production sectors. While the plan envisages pendulum-type shipping connectivity between the main islands, it has faced criticism. “The MP3EI projects focus on creating growth poles linked to their hinterlands,” Anton Gunawan, Danamon Bank’s chief economist and executive vice-president, told OBG. “But we need a vision of interconnecting these poles, which are based on the past commodity boom.”

PPP Soft Infrastructure

With private investment expected to play a key role in the plan, the government has rolled out incentives and new institutions to provide guarantees, financing and coordination for PPPs. Investors in a corridor are eligible for five- to 10-year corporate tax holidays from the start of production, followed by 50% cuts in tax for two following years. Incentives also include an annual 5% cut in income tax on investment for six years and an import duty waver on goods not produced in Indonesia, while foreign investors can take up to 95% ownership of infrastructure and industries established in the corridors.

A new Infrastructure Guarantee Fund (IIGF) under the Ministry of Finance (MoF) was established in 2011 to provide guarantees for government-related contractors in PPPs, while a Viability Gap Fund (VGF) is being established in 2013 to provide state funding for PPPs that are economically feasible but not financially viable. Funded through the state budget, the VGF will provide cash injections of up to 50% of cost during construction phase to projects of over Rp100bn ($10m) where final users will pay the principle of investment. The VGF’s main focus is on water projects but could be generalised to roads and railways, according to the IIGF.

The government has focused on easing bottlenecks in past PPPs. In 2011 a new land law streamlined acquisition procedures for projects linked to eminent domain and reduced the time and cost involved in expropriating land, setting a 319- to 583-day timeframe for the whole acquisition process. The government has also established coordinating and performance-tracking committees to expedite PPPs and government projects. The MP3EI Implementation Committee (KP3EI) was formed in 2012 to resolve bottlenecks, while a new taskforce was established in 2011 to set and monitor key performance indicators for line ministries, in a bid to improve budget disbursement. While the government’s performance on expenditure has improved, coordination of PPPs has faced challenges due to differences in priorities between line ministries, stateowned enterprises and sub-national governments.

Progress

Despite this institutional backing, progress has been slow. The Coordinating Ministry for Economic Affairs (CMEA) announced in September 2013 that a mere 14% of the total Rp4482trn ($448bn) in projects by 2025, and 18% of the Rp3590trn ($359bn) in projected spending to 2015, had been realised in the first two years. While 27% of government projects and 21% of purely private projects planned by 2015 had broken ground in July 2013, the rate of realisation for stateowned enterprise and PPP projects was much lower, at 15% and 14.9%, respectively. The pace of ground-breaking in fact slowed from Rp379.3trn ($38bn) in 2011 to Rp232.7trn ($23bn) in 2012 and Rp35.4trn ($3.5bn) in the year to July 2013, according to the CMEA.

The government has forged ahead with road upgrades, repairing 2800 km in 2012, 4500 km in 2013 and plans for 4800 km in 2014. It is also midway through its $3bn plans to upgrade 20 airports nationwide, opening Medan’s new Kuala Namu International Airport in 2013, for instance, and in its plans for a parallel railway from Jakarta to Surabaya, according to the Public Works Ministry. Bottlenecks remain, however. The planned Trans-Java Toll Road, while awarded to a consortium of investors, has struggled with land acquisition issues, while the structure of the 2700-km trans-Sumatra route remains unclear. The Jakarta provincial government has awarded six new inner city toll-roads however, while new projects linking Serpong to Balaraja in Java and Medan to Kuala Namu were tendered in late 2013. Given the lack of clear segregation between operators and regulators in port and airport developments, investments in both remains dominated by stateowned Pelindo I and II, and Angkasa Pura I and II. Indeed Pelindo II has resisted the concessioning of Kalibaru North and Cilamaya ports, according to the IIGF. Some 10 PPPs are planned in airport developments, however, including in Batam, North Bali and Yogyakarta.

In rail, the Central Kalimantan PPP railway faces structural issues, the Jakarta-Soekarno-Hatta airport express line is set to be tendered in 2014, while the East Kalimantan railway proposed by Russian Railways has yet to break ground. Existing double-track projects in Java are dominated by the state-owned Kereta Api, while the incoming Jakarta governor relaunched the capital’s mass rapid transit and monorail projects as purely government-backed in 2013. Meanwhile, the IIGF had only extended one guarantee by the fourth quarter of 2013 to the Central Java Power Project, a PPP.

Mechanism Overhaul

In its 2014 budget proposals, the government seeks to accelerate state funding under MP3EI and overhaul its coordination mechanisms. The main priority is to accelerate road upgrades and extensions, and expedite port and airport developments. Meanwhile, the presidency aims to reform the KP3EI to reduce the number of stakeholder members and create a clear order between state planning agency BAPPENAS and the MoF. “We have a problem in terms of internal coordination between BAPPENAS and the MoF in determining the projects,” Luky Eko Wuryanto, CMEA’s deputy minister for infrastructure and regional development, told a press conference in September 2013. The MoF is also establishing a PPP Centre, which will identify a pipeline of bankable PPP infrastructure